US incomes fall for first time in almost two years

October 1, 2011

WASHINGTON (AP) - Americans earned less last month, the first decline in nearly two years. With less income, consumers could cut back on spending and weaken an already-fragile economy.

Consumers spent a little more in August even though their incomes dropped 0.1 percent, the Commerce Department said Friday.

Still, most of the 0.2 percent increase in consumer spending went to pay higher prices for food and gas. When adjusted for inflation, spending was flat last month.

Many people tapped their savings to cover the steeper costs. The savings rate fell last month to its lowest level since December 2009.

The decline in income offered "more evidence that households are in quite a bind," said Paul Dales, senior U.S. economist at Capital Economics.

The data also contributed to a rough day of Wall Street. The Dow Jones industrial average tumbled 153 points in afternoon trading. Broad indexes also fell.

When people have less income, they spend less and that slows growth. Consumers spending accounts for 70 percent of economic activity.

The economy grew just 0.9 percent in the first half of the year, the worst six-month stretch since the recession officially ended more than two years ago.

Most economists have been predicting the second half of the year will be slightly better, in part because gas prices have come down since peaking this spring.

Dales estimates 2.5 percent growth in the July-September quarter and 1.5 percent in the final three months of the year. Those estimates take into account the weaker income figures.

Such growth may be enough to calm recession fears. But it is far from what is needed to lower the unemployment rate, which was 9.2 percent in August.

And Dales cautioned that he might have to lower his estimates even further if consumers have less money to spend.

"Households haven't seen their incomes increase at all this year. That goes a long way to explain why consumption growth has been so weak," Dales said. "Job growth is stagnant and even those people who do have a job are not in a position to spend because their incomes are not growing."